IBM’s 2Q Earnings Up 12 Pct

Published 12:00 am Monday, December 26, 2005

BOSTON – Second-quarter earnings at International Business Machines Corp. rose 12 percent and beat Wall Street forecasts Wednesday, largely on the strength of IBM’s software division and improvement in its services unit.

From April through June, the Armonk, N.Y.-based technology bellwether earned $2.26 billion, $1.55 per share, on revenue of $23.8 billion.

In the comparable period last year, IBM earned $2.02 billion, $1.30 per share, on revenue of $21.9 billion.

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This year’s quarterly numbers were boosted $81 million, or 5 cents per share, from the sale of IBM’s printing division to Ricoh Co. Without that gain, IBM would have seen net profit rise 8 percent, and it would have earned $1.50 per share. That beat the estimate of $1.47 expected by analysts surveyed by Thomson Financial.

IBM also surpassed analysts’ revenue forecast of $23.1 billion. The sales growth amounted to 9 percent, which IBM called its best quarterly bump since 2001.

However, the growth would have been 6 percent if not for weakness in the dollar. Softness in the greenback makes deals done in other currencies translate into more dollars.

The company’s overall profit margins increased slightly, and it registered healthy growth in each of its major global regions, overcoming a stumble in the prior period in the U.S.

“This was a really strong quarter, close to firing on all cylinders,” IBM’s chief financial officer, Mark Loughridge, told analysts on a conference call.

He also slightly increased IBM’s guidance for the rest of the year, saying earnings per share would likely rise 14 to 15 percent in 2007; his last forecast was an improvement of 13 to 14 percent.

IBM’s shares surged to multiyear highs this week after some analysts predicted IBM would exceed Wall Street’s forecast. Before the earnings report came out Wednesday, IBM stock gained 31 cents to close at $111.08. In after-hours trading, shares jumped above $114.

One common gauge of IBM’s health is services contract signings, because it foretells huge chunks of revenue that will be booked in future quarters. IBM inked $11.7 billion in services contracts in the second quarter, compared with an unusually soft $9.6 billion a year ago.

Revenue actually booked in the second quarter rose 10 percent to $13.1 billion. That would have been 7 percent if not for the weak dollar.

IBM’s hardware division saw revenue rise 2 percent to $5.1 billion, though it would have been flat without currency fluctuations. Sales of IBM’s key mainframe computers were up only 1 percent in real terms, and chip sales continued to flounder as IBM comes down in the cycle of producing processors for the top three video game consoles.

Software accounts for an outsized portion of IBM’s profit. That has prompted the company to make dozens of acquisitions to bolster its security and business-management offerings, including this week’s $161 million deal for DataMirror Corp.

IBM software revenue grew 13 percent to $4.8 billion in the second quarter, and pre-tax profit was up 8 percent to $1.25 billion, just slightly less than what the much bigger services arm generated. The sales growth would have been 9 percent at constant currency rates.

In the first six months of the year, IBM earned $4.11 billion, $2.75 per share, with revenue of $45.8 billion. Those numbers all rose from the first half of 2006, when IBM showed profit of $3.73 billion, $2.37 per share, and revenue of $42.5 billion.

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A service of the Associated Press(AP)